Case No 272/92

IN THE SUPREME COURT OF SOUTH AFRICA

APPELLATE DIVISION

In the matter between:

ELGIN BROWN & HAMER (PROPRIETARY) LIMITED Appellant

and

INDUSTRIAL MACHINERY SUPPLIERS (PROPRIETARY) LIMITED. Respondent

CORAM: HOEXTER, SMALBERGER, F H GROSSKOPF, JJA et VAN COLLER, KRIEGLER AJJA

HEARD: 19 March 1993

DELIVERED: 1 April 1993

J U D G M E N T

HOEXTER, JA

2

HOEXTER, JA

The appellant company ("the plaintiff") carries

on the business of marine engineering at Durban. The

respondent company ("the defendant") is an industrial

machinery supplier and repairer whose main place of

business is at Pinetown. In April 1991 the plaintiff

instituted an action in the Durban and Coast Local Division

against the defendant (which was cited as the first

defendant) and two co-defendants. For purposes of this

appeal no reference to the claims against the co-defendants

is necessary. Relevant to the plaintiff's action are two

contracts, as varied from time to time, which are

respectively described in the particulars of claim as "the

first agreement" and "the second agreement." Against the

defendant the plaintiff claimed payment of damages in the

sum of R1 482 179,48 flowing from the defendant's alleged

3

breaches of the second agreement.

The defendant excepted to the plaintiff's

particulars of claim on the ground that they lacked

averments necessary to sustain a cause of action. Mall AJ

upheld the exception with costs, including the costs of two

counsel. With leave of the court a quo the plaintiff

appeals against the whole of the judgment.

The terms of the first and second agreements are

set forth in paragraphs 5 to 12 of the particulars of

claim. The main content of these paragraphs may be shortly

stated. The first agreement was concluded in June 1987

between the plaintiff and Emopesca E.E. ("Emopesca"). In

terms thereof the plaintiff undertook, against payment of a

certain contract price, to overhaul two fishing trawlers,

the Sistallo and the Fontaeo, including the reconditioning

of their diesel engines, within a period of twelve weeks of

a defined date. If this period were exceeded the

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plaintiff would be liable to Emopesca for penalties. After

September 1988 the first agreement was varied by a further

agreement that, while the Sistallo would still be

reconditioned, the Fontaeo would be scrapped, save that its

two engines would be reconditioned by using parts from the

two engines of the Sistallo.

The second agreement, which was concluded in

November 1988, was a contract between the plaintiff and the

defendant. In terms thereof the reconditioning of the

aforesaid two engines would be carried out at a certain

contract price by the defendant as a sub-contractor to the

first agreement. The defendant would use the spares

available from all four engines. Prior to delivery the

engines would be thoroughly tested on a test-bed, and the

engines would be installed and run in by the defendant.

The defendant's Standard Conditions of Contract would apply

to the second agreement.

5

In June 1989 Emopesca and the plaintiff and the

defendant agreed to vary the first and second agreements.

The estimated budget price for completion of the two

engines was increased and time limits were set for the

reconditioning of the two engines by the defendant. During

September 1989 the plaintiff and the defendant further

varied the second agreement by agreeing (i) that prior to

delivery the engines would not be run on a test-bed; (ii)

the engines would be installed in the Sistallo by a

technician of the defendant assisted by labour from the

plaintiff; and (iii) the engines would be commissioned by

the defendant after they had been installed in the

Sistallo.

The performance of the engines after they had

been installed is described in paragraphs 13 to 17 of the

particulars of claim. They initially ran successfully for

some thirty hours. On 9 January 1990, when tested under

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full load conditions, the port engine failed within five

minutes. Both engines were removed and stripped and

found to have been damaged during their commissioning. The

engines were taken to the defendant's premises where they

were once again stripped and overhauled, whereafter at the

beginning of March 1990 the defendant returned the engines

to the Sistallo. On 28 March 1990, and after being

installed, the port engine was tested at Durban and again

failed. Both engines were again removed, stripped and

found to be damaged.

The computation of the damages claimed by the

plaintiffs from the defendant is set forth in paragraphs 23

to 25 of the particulars. The plaintiff alleges (i) that

in terms of the first agreement it was obliged to buy two

new engines for use in the Sistallo at a cost of R199 646;

(ii) that it suffered damages in the sum of R745 839 being

wasted costs for items installed on the Sistallo which were

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destroyed during the refitting of the engines, items which

became redundant when the new engines were installed,

labour and wasted fuel costs; (iii) that it suffered loss

and damages in the sum of R536 694,48 being the total of

penalties payable by it to Emopesca and loss of interest on

the contract price payable by Emopesca calculated from 12

November 1989 to 31 May 1990.

Mention has already been made of the fact that it

was a term of the second agreement that the defendant's

Standard Conditions of Contract ("the SCC") would apply

thereto. The plaintiff annexed to its particulars of

claim a copy of the SCC. The exception noted by the

defendant is based on the provisions of clause 8 of the SCC

in which reference is made to the defendant as "IMS".

That clause is in the following terms:-

"Whilst reasonable care will be taken to ensure

that first class materials and workmanship will

be used in the execution of the contract IMS will

not be liable for any loss or damages whatsoever

8

direct or indirect, including penalties or

liquidated damages, including consequential

damages, due to late or defective delivery,

defective, faulty or negligent workmanship or

material, or to any act, default or omission of

its employees, suppliers or sub-contractors,

unless specifically negotiated with IMS and

confirmed in writing. Any claim shall be

limited to the repair or replacement of any

defective or deficient parts, it being at the

discretion of IMS whether to repair or replace in

every instance. It is a condition precedent to

any such claim that the defective or deficient

parts shall be delivered at the purchaser's

expense to an IMS workshop or a workshop

nominated by IMS."

In its notice of exception . the" defendant recited the

provisions of clause 8 of the SCC and then stated:-

"The amounts claimed by the Plaintiff in

paragraphs 23, 24 and 25 are damages in respect

of which liability is excluded in terms of the

said clause."

The allegations in paragraphs 13 to 17 of the

particulars of claim, in which the performance of the

engines subsequent to their installation in January 1990 is

described, have already been summarised. At this juncture

9

it is convenient to see in what fashion the plaintiff

characterised the defendant's alleged breaches of the

second agreement on which the claim for damages is based.

This appears from the averments set forth in paragraphs

18(a) and 18(b) of the particulars of claim which are

quoted hereunder in full:-

18(a)

The First Defendant accordingly breached its

obligations in terms of the second agreement, as

amended, in that:-

(i) It supplied to the vessel on the first

occasion two engines that, as a result

of negligence or defective workmanship

on the part of the First Defendant's

employees, had not been reconditioned

to a reasonable and acceptable

standard;

(ii) It supplied to the vessel on the second

occasion two engines that, as a result

of negligence or defective workmanship

on the part of the First Defendant' s

employees, had not been reconditioned

to a reasonable and acceptable

standard.

18(b)

The First Defendant's breaches aforesaid

constituted fundamental breaches of its

10

obligations in terms of the second agreement in

that:-

(i) Its reconditioning of the two engines

in terms of that agreement; and/or

(ii) Its performance in terms of that

agreement;

were both totally ineffective and useless for the

purpose for which they were intended."

Clause 8 of the SCC contains a limitation of

liability clause couched in the widest possible terms.

On the face of it the exclusion of liability "for any loss

or damages" in the clause refers to every kind of loss or

damages. The damages claimed by the plaintiff are alleged

to flow from "negligence or defective workmanship" of the

defendant's employees. Clause 8 specifically excludes

liability for damages "due to ....defective .... or

negligent workmanship....or to any act, default or omission

of its employees . . . ." If clause 8 means what it says

then it relieves the defendant from liability for loss

flowing from precisely the breaches of contract pleaded by

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the plaintiff in paragraph 18 of its particulars.

Mr Shaw, who argued the appeal on behalf of the

plaintiff, sought to avoid such a construction of clause 8

by reliance on two alternative arguments. The first

argument was based on the introductory words which preface

the exclusionary provisions and which read:-

"Whilst reasonable care will be taken to ensure

that first class materials and workmanship will

be used in the execution of the contract ...."

Mr Shaw submitted that the words just quoted created on the

part of the defendant a contractual obligation which

operated reciprocally with the exclusionary provisions in

the remainder of clause 8. From this it followed, so the

argument proceeded, that in order to invoke the protective

effect of the exclusionary provisions it was a legal

precondition that the plaintiff should plead and prove that

it had discharged its obligation stipulated in the opening

words. This argument appears to me to be untenable. In

12

Agricultural Supply Association v Olivier 1952(2) SA 661

(T) (Olivier's case) the issue on which an appeal from the

magistrate's court turned was the meaning of a non-warranty

clause by which the supplier of seeds excluded its

liability in certain circumstances. It was held that no

cause of action on the part of the buyer lay, and that the

exclusion of liability was unaffected by a statement

preliminary to the operative clause that the supplier took

'the utmost care to supply seeds, plants, etc., true to

name and character'. De Wet J (at 664B-H) endorsed, as

being in accordance with our law, and applied the

following principle cited by Halsbury Laws of England vol

10 para 352 (Hailsham ed):-

"In the construction of an instrument the

recitals are subordinate to the operative part,

and consequently, where the operative part is

clear, this is treated as expressing the

intention of the parties, and it prevails over

any suggestion of a contrary intention afforded

by the recitals."

13

Olivier's case (supra) was discussed in Wijtenburg

Holdings, trading as Flaming Dry Cleaners v Bobroff

1970(4) SA 197(T). In the latter case Viljoen J (at 206G)

and Phillips AJ (at 214C) came to the conclusion that the

decision in Olivier's case was clearly wrong. I am, with

respect, unable to agree with that conclusion.

In the instant case the operative part of clause

8 appears to me to be both clear and unambiguous. It is

unnecessary to enlarge upon this topic because in any event

it seems to me that in the present case the recitals do not

in fact reflect any intention contrary to the operative

part. The recitals are ushered in by the word "Whilst".

It seems to me that it would involve a strained and

unnatural interpretation to read the recitals as meaning:-

"On condition that reasonable care will be taken

to ensure...."

I agree with Mr Wallis, who appeared for the defendant,

that the recitals are properly to be construed as

14

signifying no more than

"Notwithstanding the fact that reasonable care

will be taken to ensure ..."

There is, I consider, a compelling reason which militates

against the interpretation supported by counsel for the

plaintiff. That interpretation would create an antithesis

between the recitals and the operative part which would

entirely deprive the exclusionary provisions of contractual

force.

I turn to Mr Shaw's alternative argument. While

conceding that clause 8 used words of wide import counsel

pointed out that its exclusionary terms did not cover the

eventuality of "complete non-performance" on the part of.

the plaintiff. Next it was urged upon us that no sensible

reason existed for drawing a distinction between (a) the

situation in which a party contractually bound makes no

attempt whatever to perform his part of the contract and

(b) the situation in which the contracting party makes

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attempts towards performance which are completely

ineffectual. In neither case, so it was said, does any

benefit accrue to the other party to the contract. Since

in paragraph 18(b) of its particulars the plaintiff had

pleaded "complete non-performance" it was submitted that

clause 8 did not relieve the defendant from liability for

the plaintiff's loss.

I am unable to accept Mr Shaw's alternative

argument. Its roots are to be found in the outmoded

English doctrine of fundamental breach which, in the matter

of interpreting exemption clauses, has never been part of

our law. According to the doctrine, if I understand it

correctly, the position in English law was at one stage

thought to be that an exemption clause, no matter how

widely expressed, availed the party seeking to invoke it

only when he performed his contract in essential respects.

It did not avail him when he was guilty of a breach going

16

to the root of the contract - see the remarks of Denning LJ

in Karsales (Harrow) Ltd v Wallis [1956] 2 All E R 866

(CA) at 868I - 869A. The effect in the current state of

English law of a "fundamental breach" of contract upon a

provision in the contract exempting the party from

liability is stated thus by Halsbury, Laws of England, 4th

ed. vol 9 para 372 at pp 247 - 8:-

"At one time it was considered that there was a

rule of law whereby no exclusion clause could

protect a party from liability for a 'fundamental

breach' or breach of a 'fundamental term' of the

contract. It is now clear that no such rule of

law exists and that the earlier cases are only

justifiable on grounds of construction of the

individual contract involved. The true

principle is that in all cases the question is

one of construction, and the court must determine

whether the exclusion clause is sufficiently wide

to give exemption from the consequences of the

breach in question. If the clause is

sufficiently wide the result may be that the

breach in question is reduced in effect or not

made a breach at all by the terms of the clause,

notwithstanding that without the clause it would

be a breach of sufficient gravity to allow the

other party to be discharged from the contract."

17

See further: Suisse Atlantique Societe d'Armement

Maritime SA v NV Rotterdamsche Kolen Centrale [1966] 2

All ER 61 (HL); Photo Production Ltd v Securicor Transport

Ltd [1980] 1 All ER 556 (HL); Ailsa Craig Fishing Co Ltd v

Malvern Fishing Co Ltd and another et e contra [1983] 1 All

ER 101 (HL).

A South African decision on which Mr Shaw sought

to rely was Hall-Thermotank Natal (Pty) Ltd v Hardman

1968(4) SA 818 (D). In that case, which also involved the

construction of an exemption clause it was argued (see 834

in fin) that the clause would not protect the plaintiff in

a case of fundamental breach of contract. The court found

that there was a fundamental breach and upheld the argument

(836E). The learned judge (Henning J) began by saying (at

835B-C) that he knew of no rule of our law to the effect

that an exemption clause did not avail a party who had

committed a fundamental breach of contract. That

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notwithstanding he went on to say (at 835 E-F):-

"In spite of the emphatic language of the

exemption clause in this case it appears to me

that the parties could hardly have intended that

the plaintiff would be exonerated from liability

if it failed to perform its obligations at all,

or if its performance proved useless, or if it

committed a breach going to the root of the

contract. After all the parties must have had

in mind that both of them would carry out the

terms of the contract. It is most unlikely that

they contemplated that the plaintiff would be

excused from the consequences of a fundamental

breach. The clause is in my view to be

construed as affording limited protection to the

plaintiff against faults or imperfections in the

product of its labours, which is otherwise

substantially in accordance with the contract.

Mr Feetham conceded that, if the plaintiff

committed a fundamental breach, or a breach which

went to the root of the contract, the exemption

clause would not apply."

In my judgment the concession by counsel to which Henning J

referred was incautiously made, and it represents an

incorrect statement of the legal position. So too does the

learned judge's consequential finding (at 836E):-

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"....that a complete failure of the plant

entitled the defendant to repudiate the contract.

I am satisfied that the exemption clause does not

operate...."

In the instant case one is not concerned with

total non-performance on the part of the defendant in the

sense that the defendant did nothing whatever to perform

under the second agreement. It is therefore unnecessary to

consider whether, had there been such complete non-

performance, the defendant would have been able to invoke

the protection of clause 8. Here the defendant in fact

performed, however much such performance may have

disappointed the expectations of the plaintiff.

The extent of positive malperformance may no

doubt in a particular case be such that the plaintiff is

no better off than he would have been had the defendant

been guilty of total non-performance. In my view,

however, total non-performance on the one hand and positive

malperformance on the other are in the law of contract two

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separate and distinct concepts; and it is impermissible to

treat them as being identical. The extent of a breach and

the question whether it is fundamental or goes to the root

of the contract are matters relevant in determining whether

there is a right of rescission. But the fact of a

fundamental breach is irrelevant and alien to the

construction of an exemption clause and cannot govern its

compass. In the instant case the exemption in clause 8

serves to protect the defendant even if it were to have

committed a fundamental breach of the second agreement.

Cf the remarks of Didcott J in Government of the Republic

of South Africa (Department of Industries) v Fibre Spinners

& Weavers (Pty) Ltd 1977(2) SA 324(D) at 339B-F.

In my judgment Mall AJ correctly upheld the

defendant's exception. Counsel were ad idem that, should

this court so conclude, the order in the court a quo should

be altered to provide for the striking out of paragraphs

21

23, 24 and 25 of the particulars of claim and the prayer

relating thereto. Although that is how the prayer to the

notice of exception read, Mall AJ merely allowed the

exception with costs. The question arises whether

counsel's suggestion should be followed. I do not think

so. The nature and effect of an order upholding an

exception to a combined summons on the ground that it does

not disclose a cause of action were recently considered in

the as yet unreported judgment of this court in the case of

Group Five Building Ltd v The Government of the Republic of

South Africa (Case No 400/91, delivered on 18 February

1993). At page 26 of the typed judgment Corbett CJ said

the following:-

"As far as I am aware, in cases where an

exception has successfully been taken to a

plaintiff's initial pleading, whether it be a

declaration or the further particulars of a

combined summons, on the ground that it discloses

no cause of action, the invariable practice of

our Courts has been to order that the pleading be

set aside and that the plaintiff be given leave,

22

if so advised, to file an amended pleading within

a certain period of time."

In the present case an order upholding the defendant's

exception results in the plaintiff's particulars of claim

against the defendant (the first defendant in the action)

having to be set aside. It is ordered as follows:-

(1) The appeal is dismissed with costs, including the

costs occasioned by the employment of two

counsel.

(2) The order of Mall AJ is altered to read:

"a) The exception is upheld.

b) The plaintiff's particulars of claim as

against the first defendant are set

aside and the plaintiff is given leave,

if so advised, to file amended

particulars of claim within thirty

days.

c) The plaintiff is to pay the costs,

including the costs occasioned by the

employment of two counsel."

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(3) The period of thirty days referred to in

paragraph 2(b) above will run from date of

delivery of this judgment.

G G HOEXTER, JA

Smalberger, JA )

F H Grosskopf, JA ) Concur Van Coller, AJA ) Kriegler, AJA )